Divestment From Coal Does Work! Now The Finance Industry Must Reject Requests For Coal Capital

It’s clear: bank divestment from coal reduces carbon dioxide emissions. That’s because the coal industry is reliant on large amounts of capital, typically from banks. When they don’t have it, they struggle.

Harvard Business School professors Boris Vallée and Daniel Green were curious about the relationship among coal power, bank divestment, and reduced carbon dioxide reductions. They mused, could the finance industry do even more to confront climate change?

Their 2022 report, “Can Finance Save the World? Measurement and Effects of Coal Divestment Policies by Banks,” offers some very promising results.

• Coal firms that face strong divestment policies from their historic lenders reduce their borrowing by a quarter compared to their unaffected peers.
• This capital rationing leads to reductions in CO2 emissions, as divested firms are more likely to close facilities.

“To break up the status quo and to decarbonize our economies, we need to think differently and ask new questions,” suggests Vallée, the Torstein Hagen Associate Professor of Business Administration.

What’s All the Concern about Coal?

The International Energy Agency has warned that there can be no new oil, gas, and coal development if humanity wants to prevent dangerous warming beyond 1.5 degrees Celsius (2.7 Fahrenheit). Coal is the source of more than a fifth of all CO2 emissions and is more carbon-intensive than any other energy source. Phasing out coal-fired power production is critical to reaching net zero. But that goal may not be easy to achieve.

The shift away from coal to renewable energy for electricity generation is producing environmental benefits to mitigate the climate crisis but also poses uncertainty for coal producers and others along the coal supply chain.

The coal industry spent just under 3 million dollars in 2019 on campaign donations — primarily for Republicans, as only 4% of coal donations were directed to Democrats. These donations funded campaigns to convince citizens, utilities, and governments that continued investment in coal was necessary. The resulting organized disinformation campaigns denied that the climate crisis even exists and perpetuated reliance on coal through public skepticism about its replacement with renewable energy.

Actually, research shows that the economic benefits of replacing coal with renewables would far outweigh the costs. In fact, ending coal use shouldn’t be seen as too costly because it provides economic benefits from reduced carbon emissions.

Overall, Europe has seen a large shift of attention towards the need for climate action, and many parties across the spectrum agree, as indicated by the broadly-agreed decisions to phase out coal in Germany and the UK.

The Connection between Banks & Coal Emissions

The fossil fuel divestment movement began back in 2006 with a student campaign in the United Kingdom. The thinking since then has been that divestment from fossil fuel companies could help align financial flows with climate targets and reduce the related risk exposure of investors. While well-intended, the efforts often seemed more ethical than forcing substantive change.

Research previous to the Harvard study showed that investor decisions to exclude fossil fuel companies vary significantly in scope. For example, some choose to exclude the largest fossil fuel companies based on reserves. Others reject companies with business plans that are incompatible with the Paris Agreement. Some turn their investments away from companies based on a revenue percentage derived from coal only.

One analysis found abnormal stock returns from 200 large coal, gas, and oil companies after prominent divestment. Another found a negative short-term effect on share prices following divestment, but the overall evidence on direct effects remained limited, and the duration of potential effects continued to be unclear.

In 2021, the Harvard researchers began to seek evidence that the coal divestment policies of large banking institutions are effective at reducing carbon emissions. To do so, they used coal lending bans by banks around the world as a laboratory.

The researchers:

• examined 12 years of data between 2009 and 2021 on bank’s coal divestment policies, coal company financing transactions and financial statements, and the operating status of coal mines and coal-fired power plants
• identified about 80 banks around the world that have implemented coal divestment policies, affecting more than half of coal lending activity
• spoke with executives at several banks that have implemented coal divestment bans following the 2015 Paris Accords
• used a shift-share instrument combining the lending ban strength measure and timing with borrower-bank relationships
• culled insights from Berlin-based Urgewald, a nonprofit that produces the Global Coal Exit List, which contains 3 divestment criteria that investors can apply to screen coal companies out of their portfolios
• documented large effects of the policies on coal firm loan issuances, as well as on their outstanding debt and total assets

They came to understand that the banks that are the most active in coal lending enact weaker divestment policies. The Harvard research illuminates how the coal industry has few options for securing alternative debt financing if an existing source vanishes. The number of banks that facilitate coal-related deals is so small — and the relationships so deeply entrenched — that by default, these bankers have disproportionate influence over what gets financed.

Coal-fired power plants owned by companies that are exposed to bank divestment policies are more likely to be retired, the research shows. “What we found in this case is that banks divesting from coal directly leads to real impact—more than anyone thought,” Vallée said. “This means that the financial effects translate into environmental effects. By reducing capital expenditures, facilities are decommissioned, and CO2 emissions ultimately fall, as any alternative source of energy is less carbon-intensive.”

Final Thoughts about Divestment from Coal

Shareholders of Citi, Wells Fargo, and Bank of America vote this week on several resolutions demanding the banks set stronger climate targets and stop financing fossil fuels. A similar version of this resolution was filed last year and received 12.8% shareholder support at Citi and 11% support at Bank of America and Wells Fargo. Activists believe even 10% to 15% support would increase pressure on the nation’s biggest banks to do more to address the climate crisis.

Also this week, the Securities and Exchange Commission is expected to unveil a closely watched rule that would require all publicly traded companies to disclose their emissions and the risks they face from climate change. Scope 3 emissions are a point of contention. As the Climate 202 notes, Danielle Fugere, president of the shareholder advocacy group As You Sow, said that regardless of the rule, banks will face sustained pressure on climate in the boardroom. “If scope 3 emissions are not part of that rule, shareholders will continue to seek action on scope 3 emissions and continue to ask for the types of actions that you see in these proposals.”